View from City Road: Tripping up in grandmother's footsteps

Thursday 24 March 1994 00:02 BST

Click to followThe Independent Online

The bond and equity markets suffered a double whammy yesterday as they absorbed the news both that the US Federal Reserve had again raised interest rates, and that the UK inflation figures were a little worse than expected. They should not panic. The scenario of falling inflation remains in place, and that will in turn allow European markets to detach themselves more convincingly from the preoccupations of Wall Street.

The drop in the headline inflation rate from 2.5 per cent in January to 2.4 per cent in February was disappointing, when most analysts had expected 2.2 per cent. Prices rose in February by 0.6 per cent, nearly as much as a year before. But a detailed look at those increases does not suggest sustained inflationary pressure. Half of the rise is due to just two sectors - clothing and footwear and car prices - which may well be forced to relent.

With clothing and footwear, it is quite likely that we will see the same pattern as last year, with retailers attempting a game of grandmother's footsteps with the consumer. They raised prices, hoping the shopper would not notice. But shoppers did notice, generally forcing new price cuts to stimulate trade. This year, we already know that retail sales volume fell by 0.5 per cent in February in response to these price rises, and it is just as likely that retailers will have to roll the prices back.

Nor are new and second-hand car prices worrying. Although second- hand prices rose last month, new car prices are now falling, and this will eventually bring second-hand prices down too. The changes in the company-car tax regime will encourage consumers to buy what they really want, rather than over- consuming high-specification models simply because of the tax breaks. British prices should gradually fall towards Continental ones.

All in all, yesterday's figures are still consistent with a headline rate near 2 per cent this summer. Combined with the likely impact of tax increases and more Continental interest rate cuts as the Bundesbank finally grapples with the sluggish German economy, the background to lower UK rates is likely to remain in place.